Back to basics: cutting costs with better inventory management

Part 1: Knowing what you’ve got

Companies often evaluate their supply chain with an eye toward transportation costs. There is nothing wrong with this approach, and transport costs are usually the lion’s share of logistics costs, but inventory related costs should not be ignored. Inventory and warehousing costs may be your second largest logistics spend, and reducing those costs can help quite a lot.

Of course, every business is different. Different industries have different inventory needs, and different levels of customer service offerings within the same industry have different requirements. Nonetheless, every business has to decide how much inventory to maintain to offset the risk of supply chain shortage, changes in demand, and inaccuracy of market forecasts. The marketing team also makes its own demands on your storage capacity, as you well know.

You need to have a modern, detailed approach to inventory control, even if only to reduce unnecessary and unproductive expenses. Not controlling things tightly costs you in terms of space, labour, and business lost from late deliveries and backorders. When you consider that even a smallish company can have millions tied up in inventory at one point in the supply chain or another, even a few percentage points saved with modern techniques will pay for themselves in short order.

So, rule 1 is that you need to know what you’ve got on hand, and what’s coming.

To understand your inventory position on any kind of a detailed level, you need to keep track of your inventory in SKU terms. You need to know what you have, how much of it, and where it physically is. If you don’t know that, you may already be in trouble. Detailed knowledge involves the full history of each of your SKUs. You need an order history, and the usage rate of each SKU at your fingertips so you can predict how many weeks (or days) of inventory you have on hand for each.

Next week, look for Part 2: Improved processes: inbound, putaway and replenishment